Understanding Money Markets

Understanding Money Markets

Money Markets are oftentimes confused with bonds, which is a type of fixed income security. They are both very conservative ways of investing. However, the difference comes into play when dealing with the length of time it takes for the security to mature. Bonds are more long-term debt securities while money markets are considered more short-term due to the fact that they mature in less than twelve months. Because of the short-term maturity of money market investments, they are coined as “cash investments.”

Money markets are a conservative way to invest your money. They are the equivalent of an IOU, and can be invested in the government, banks, or companies. As with many short-term, conservative ways of investing, money market securities do not offer as high of returns on the initial investment. If you’re looking for something that can provide higher profits, you will be looking at other investments that are more volatile and risky, such as the stock market.

But don’t confuse the two–money market securities and stock market securities are two different kinds of investments–and have different risks associated with them. When you purchase a stock, you will oftentimes work through brokerages and trade in stocks with both high and low denominations. Money markets, on the other hand, are typically traded in high denominations to ensure low risk, and are controlled in the dealer market, meaning the company handles the trade of the securities, not a broker. Since money market securities are more conservative and short-term, they are also not purchased and traded as much as stocks.

Many investors will access money market securities through a money market bank account or money market mutual funds. What happens in these situations is that numerous individuals and investors are putting their investment funds into a financial institution which then purchases these securities and investments on behalf of their money market contributors. If you want to have more control over your money market investments, you would likely prefer treasury bills instead.

Money markets can be confusing if you’re not sure of all the different ways to utilize them. Let’s go through the various ways an individual can invest in a money market security and enjoy a conservative way to invest.